TMFJMo (< 20)

Starbucks Verismo Machine Call Notes

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OK, well big news today on Starbucks and their new machine. They hosted a call earlier, so let’s take a look:

• Starbucks announces Verismo, a signature at home single-cup machine that will deliver a coffee experience that meets commitment to taste and quality.

• The idea goes back 3 years as they started estimating the size of the single cup market. All started with VIA. VIA is expected to be a $1 billion business.

• Current relationship with Green Mountain is expected to continue. They stress this all over the call; out of respect it seems.

• From ceo Howard Schultz: “We want to support Green Mountain. We want to support K-cups, and we believe we can continue as we have in the early days to build a billion dollar business in that category. But the context that I want to try to explain to you, is that we felt from day one that the biggest prize in this category over the long-term domestically and globally was going to be espresso based beverages which is at the heart and soul of the equity of the Starbucks retail experience. The Green Mountain partnership because it is a machine that basically brews brewed coffee and is a low pressure machine we needed an opportunity to compliment the partnership with Green Mountain and candidly compete with what Nestle has done overseas in a very positive way. The Verismo machine will give us Starbucks like quality in terms of espresso based beverages and will also give us the ability to make milk-based beverages unlike anything that we have found on the market today. When you look at the comprehensive offering we have for our customers, VIA, single cup on the go, our partnership which we will continue to support with Green Mountain which is brewed coffee, single cup, and now the introduction of Verismo we are putting ourselves in a position where unlike any other company we have a comprehensive offering which is just the beginning to satisfy the unique needs that our customers have.”

• “Not unlike VIA, we will validate Verismo in our stores, then we will create an unique proprietary specialty business in which we will sell and distribute the machines and the pods following the validation of the machine living in our stores. “

• Globally the single cup category is about $8 billion market.

• Machines will be manufactured via Kruger Co., a private German based company. Coffee and milk pods manufactured and sold by Starbucks. It is expected to revolutionize the at home espresso market.

• “Verismo by Starbucks will be available online in high end specialty retail stores and select Starbucks retail stores in the US and select international markets this fall in time for the critical holiday gift buying season when approximately 50% of the single-cup brewing machine sales occur.” I have a feeling I know what Santa may be bringing this Christmas. This will not however have any effect on FY2012 financial results/capital expenditures.

• This is in part a response to the share that Nestle has gained over the past couple of years in Europe with Nespresso. Starbucks wanted to key in on a high pressure machine to enhance the at home espresso experience.

• This will be 100% Starbucks coffee. Question about the milk, this is shelf-stable milk 100% natural and 100% dairy tastes like fresh milk.

• At this time they see only Starbucks brands used by the system, no clarity on whether they would consider other brands/partnerships down the road but that doesn’t appear to be the goal at this time.

• No hints to capacity at this time in regard to what Kruger may be able to produce in a given period of time. That should be coming soon along with more on pricing.

• The Verismo is not compatible with K-Cups. K is a low pressure system, the Verismo is a high-pressure system.

• No concerns of cannibalization; this is simply another way to extend the Starbucks/consumer relationship for those who prefer this convenience. I think there’s a lot to be said for this too. For example, you finish dinner one night at home and you’re not necessarily wanting to go to a store to get an espresso or cappuccino. So this machine gives a superior alternative while staying in that Starbucks universe.

• It is a closed system and they fully expect patent protection on the property.

The bottom line is this is not an answer to the K-Cup machine; it’s a totally different product in the high-pressure versus low pressure offering from Green Mountain. It was stated over and over again in the call that Starbucks expects to maintain the relationship with Green Mountain. I could even see why one might have one of each of these machines to be honest. It seems that they produce two different styles of beverages. It’s more of a response to Nestle and their Nespresso machines it sounds like. While Nestle has penetrated the European market with these machines, it doesn’t carry the same name here and I’d also argue that folks will certainly give it a second thought from here to Kazakhstan if they have a choice between the two.

Either way, killer announcement today. Starbucks shot up a bit more than 3.5% after hours and Green Mountain got pummeled to the tune of 15% after hours. It seems a bit of an over-reaction on the Green Mountain side considering the nature of the two machines and the stressing of maintaining the relationship on the call. But it also shows who the real coffee king is too. Green Mountain’s got nothing on these guys.